Even in the midst of one of the greatest challenges to capitalism in 75 years, involving a breakdown of the financial system due to “irrational exuberance,” greed and the weakness of regulatory systems, European Socialist parties and their left-wing cousins have not found a compelling response, let alone taken advantage of the right’s failures.

German voters clobbered the Social Democratic Party on Sunday, giving it only 23 percent of the vote, its worst performance since World War II. . . .

Thursday, September 24, 2009

When Pittsburgh's steel industry began to fall apart, steel workers needed to find a new way to survive. Marketplace's Rico Gagliano spoke with former steel workers to see if they had any advice for autoworkers in Detroit.

As government leaders discuss trade issues, a story in this week's The Wall Street Journal reported on some of the bizarre trade rules that are still on the books. Reporter Matthew Dolan tells Linda Wertheimer about a story he dug up on how Ford Motor Company does some fancy maneuvering to get around an import tax that started in the 1960s with chickens.

Paul Krugman cites a concern for mathematical elegance over truth and reliance on efficient market theory as reasons for economists underestimating the instability of markets. But similar arguments could be made about the Keynesianism that Krugman advocates. In its heyday, Keynesianism included elegant mathematical models that demonstrated markets are inherently unstable and had its own version of an efficiency theory, only it was government that was efficient; a wise and good government could fine-tune the economy through appropriate fiscal policy. . . .

I have pulled out the propositions with which at least seven out of every ten economists broadly agree, simplifying the language in some cases. You should check the original for the exact propositions, as well as the proportions agreeing.

Here are propositions, then, with which at least 7 out of every 10 economists broadly agree:

The US should eliminate remaining tariffs and other barriers to trade.

The US should not ban genetically-modified crops.

Employers in the US should not be required to provide health insurance to ALL their employees.

The US should allow payments to organ donors and their families.

A Wal-Mart store typically generates more benefits to society than costs.

Economic growth in developed countries like the US leads to greater levels of well-being.

Thursday, September 17, 2009

HOW well off are Americans? Frenchmen? Indians? Ghanaians? An economist’s simplest answer is the gross domestic product, or GDP, per person of each country. To help you compare the figures, he will convert them into dollars, either at market exchange rates or (better) at purchasing-power-parity rates, which allow for the cheapness of, say, haircuts and taxi rides in poorer parts of the world.

To be sure, this will give you a fair guide to material standards of living: the Americans and the French, on average, are much richer than Indians and Ghanaians. But you may suspect, and the economist should know, that this is not the whole truth. America’s GDP per head is higher than France’s, but the French spend less time at work, so are they really worse off? An Indian may be desperately poor and yet say he is happy; an American may be well fed yet fed up. GDP was designed to measure only the value of goods and services produced in a country, and it does not even do that precisely. How well off people feel also depends on things GDP does not capture, such as their health or whether they have a job. Environmentalists have long complained that GDP treats the despoliation of the planet as a plus (via the resulting economic output) rather than a minus (forests destroyed).

In recent years economists have therefore been looking at other measures of well-being—even “happiness”, a notion that it once seemed absurd to quantify. . . .

Tuesday, September 15, 2009

(Note: Many thanks to my friend and expert in industrial organization, John Lunn, for his input in the post below.)

Remember, I like Tim Harford's work at the Financial Times. I really do. That's why it didn't feel good earlier this week when I critiqued his caricature of how economists think about economic decision-making.

But looking for something totally unrelated the other day on YouTube, I stumbled on this video of Mr. Harford giving a lecture on price discrimination at the Developments in Economics Education conference in Cambridge. And it's pretty clear from the video evidence that he is more than a bit fuzzy on what constitutes price discrimination.

Take a look at the video. Then check out my response beneath it.

Well, I've watched this video over and over the last couple of days, always trying to give dear Mr. Harford the benefit of the doubt. Nevertheless, if this video were Mr. Harford's response to an exam question like, "Define price discrimination. Give examples.", he would probably not receive a passing grade--at least from me in my principles of microeconomics course. Here's why.

Unfortunately, it is not uncommon to find economists--mistakenly--referring to any pricing scheme as discrimination. But the standard definition of price discrimination in economics is this: Price discrimination is said to occur when a firm, owing to at least some monopoly power, charges different prices to different groups of buyers for an identical good or service. Real examples of price discrimination include student discounts, senior discounts, lower airfares with a Saturday-night stayover than without, and movie matinee prices.

Therefore price discrimination is not what Mr. Harford discusses--at all--in his price discrimination talk. His talk is actually about product differentiation: charging different prices for similar--but not identical--goods.

Whenever one starts talking about price discrimination, the first question should be "Where is the monopoly power?" Now Starbucks may have some, but I doubt it is all that great, and probably relates to the unique experience at Starbucks, rather than the coffee quality alone.

There were a few other points in the video that made me scratch my head. For example, I don't know all of the prices at Starbucks, but the price-volume combinations at most shops like it work out so that the per-ounce price is lowest for the venti (big) size and highest for the tall (small). So your best per-ounce value is actually the biggest drink. Yet the talk made it sound like the opposite is true.

In fairness, though, the "short" he talks about is more difficult to explain. It cannot be explained by people merely wanting a greater variety of sizes, since it is not listed on the menu. It's possible Starbucks keeps it available in order to prevent losing a sale, but keeps it off the menu to discourage many orders of that size. But I question whether that is a sufficiently reasonable explanation.

So if you are looking for a cool video about price discrimination--that also gets the economics exactly right--skip Tim Harford's. Instead, check out this one two of my students at Hope College made last year:

Monday, September 14, 2009

Over the weekend we learned that the United States would impose three years of import tariffs on tires made in China--beginning at an eye-popping 35 percent. In an excellent article this morning, ConsumerAffairs notes that roughly 17 percent of tires sold in the US in 2008 had been made in China.

China is not taking this affront lying down; they are hitting back. Working on Sunday, the Chinese have introduced import tariffs of their own--on US-produced auto parts and chicken products.

Tariffs and other protectionist measures are not good. Yet we fail to learn this lesson. Today it is Chinese tires. In 2002 it was steel made in nations like Ukraine, Russia, Japan, China, and South Korea. You may not remember it, but way back in 1995, then-President Clinton proposed placing a 100-percent import tariff on Japanese luxury automobiles.

Trade wars--just like real ones--hurt people. And the collateral fallout is considerable, and rarely fully accounted for in advance. For example, I'm guessing that the already-staggering US auto parts workers aren't happy to know that (1) tires will cost more the next time they shop for them, and (2) their jobs are now at even greater risk because China slapped a retaliatory tariff on US auto parts.

Sunday, September 13, 2009

Tim Harford was on NPR's Morning Edition recently, plugging his new book, Dear Undercover Economist, a compendium of the advice columns he regularly writes for the Financial Times, where he serves on the editorial board. Ari Shapiro's interview with Harford is excellent. I enjoyed it so much that my class and I listened to it together during our meeting the same day.

Now I enjoy Harford's work immensely. Some of you may have even noted that his blog is one that has appeared in my blogroll for some time now. But I have a bit of a bone to pick with the way that Harford frames how economists think on things.

To give a backdrop the nature of my disagreement, here are a few snips from the NPR page. (I'd encourage you to listen to the entire interview, though. It really is good!)

Economists aren't known for their softer side. . . .

They should be the last people you ever ask for relationship advice.

"There is a certain irony in economists who have the least developed emotional register of any social scientist, giving dating advice," says economist Tim Harford, who lives that irony every day. . . .

"There's no consideration of morality," says Harford, who channels his pure inner economist when he writes the advice column.

And he sees that pure inner economist almost as an evil twin who doesn't care how rude he is or how much he cuts through the emotional complexities of a situation.

Sorry, but economics is not merely about sorting out the institutional arrangements in play, then pursuing unbridled hedonism with no thought to the social or emotional consequences. (That is, unless some anti-economist--as Harford tells it--should sweep in at the end and nudge us into some relatively moral direction.)

Our emotions, our feelings, our possible guilt, our concern for the well-being of others, and even a consideration of whether we will look ridiculous or not--all of these factors enter directly into our economic decision-making. They are not some mere final consideration before we plunge headfirst into the most opportunistic pool available. Adam Smith knew this, and said as much in both his Theory of Moral Sentimentsand the Wealth of Nations.

And the fact that they are not an afterthought is one of the reasons that the same self-interested models of economic behavior that work well in explaining the life and work of Donald Trump work equally well in explaining the life and work of Mother Teresa. Both have lived their lives in the pursuit of their self-interest--in whatever sense "self-interest" has happened to mean to each of them. And for Mother Teresa, the plight of the world's most downtrodden and helpless was one of the primary influences motivating her life's work. Serving them was what she wanted to do.

Now, to be fair, economists--and Harford--often do not fully incorporate such considerations into their economic modeling because emotional and social consequences prove less tractable than, say, expected alternative monetary payoffs from one course of action versus another.

But just because they are less tractable than other factors that influence the choices we make does not mean that they do not matter, or more to the point, that they do not enter directly into our choice framework.

Saturday, September 12, 2009

In class just yesterday, we were unlocking the powerful conclusion that free trade between nations increases consumption possibilities for all--beyond what each nation would have available if it isolated itself from the rest of the world.

This happens because, with trade, each nation is free to produce goods and services in which it enjoys a comparative advantage--an ability to produce a good at a lower opportunity cost than others can.

So, for example, a nation like Canada can grow a lot of wheat, and then use their silos full of it in trade to buy the computers it needs from nations like Japan. That way both nations have computers, they are fed, and--and this is where it gets really exciting--it's possible for both nations to consume more of both goods than would be possible if they were living in isolation with no trade whatsoever, relying only upon their own workers to make all the goods they need.

Which is why it is so troubling that the United States continues to roll out antiquated trade barriers in an effort to "protect" Americans and their jobs. The last presidential administration committed this sin during its first term, imposing hefty tariffs on imported steel. And today we learned that the current administration will impose three years of tariffs on tires imported from China, in an effort to save American tire jobs. The tariff rates will begin at a whopping 35 percent.

But trade barriers such as tariffs make Americans worse off, because they don't let us enjoy the fundamental benefit of free trade in this case: cheaper tires for all. Instead we settle for propping up industries to benefit a few, at the expense of the rest of us, presumably to help our economy. Yet cheap steel and cheap tires are good for our economy, regardless of where they come from.

So that's the economic argument. But I believe there's also a moral dimension here.

In the case of the 2002 steel tariffs, we were deliberately trying to help domestic steel companies by hurting foreign ones. In effect, we were saying that steel jobs for US workers are more important than jobs for foreigners working hard to make life better for themselves and their families. Specifically, in 2002, we were--through our misguided policy actions--saying that human beings here are more valuable than our fellow human beings in China, Japan, South Korea, Ukraine and Russia. And I have a very hard time with that.

And this time it's even more personal, since we are imposing the tire protections against just one country, in an effort to prop up tire-makers in our own who apparently are "better" somehow. Sorry--I just don't buy that.

So let's not permit an "us vs. them," "USA! USA! USA!," mentality to cloud our economic judgment. Free trade makes life better for all, both domestically and globally. And we should tread lightly when our efforts to help a tiny minority cause harm to the rest of us.